Monetarists & Keynesians

Milton Friedman believed that the only serious cause of cyclical instability is located in the monetary side of the economy.
It is the task of central banks to ensure that the money supply grows at a slow & steady rate to avoid crises.

Keynes differentiated between household (consumer) spending & investment by entrepreneurs. The former were relatively constant in their spending, but the latter was unstable due to ‘animal spirits’. Hence the instability was located in the ‘real’ economy, not the monetary side. the third sector, the government, was required to bring stability by spending when private sector investment was low, & to run a surplus when there was a boom – ‘stabilisation policies’. The government spending, when recession threatened, was to be financed by borrowing, not from taxes, & so thereby putting the private sector hoarded money to use.

Monetarists argue that the Keynesian fiscal stimulus finance from borrowing ‘crowds-out’ private sector investment. Keynes recognised that if there was insufficient money available for lending, government deficits will raise long-term interest rates & so reduce the rate of profit for enterprises, which would then reduce the level of capitalist investment, making the problem it was trying to resolve worse.

Keynes also advocated a rapid growth in the money supply when recession threatened, as he saw no inflationary threat when there was idle capital.

Value & Exchange-Value

Abstract human labour creates value, not concrete labour.
It is a homogenous social substance, not a physical one.

Under capitalist production, the value of a commodity can never be measured directly in terms of hours of abstract human labour but must take the form of exchange value.
The exchange value of a commodity is always measured in the use value of another commodity. Economically real prices are therefore weights of gold bullion, assuming gold functions as money.

Most capital does not consist of money. But all capital is always measured in terms of money.

Types of Money

Commodity Money (e.g. Gold) – gold is rare. It can represent a large amount of value in a small size & its high price limits its use in production.
Price is a weight of gold. Gold is directly social, other commodities have to be sold on the market first to validate their portion of social labour time to determine their price.

Token Money – governments declare a paper currency as legal tender for payment of all debts.
If over-issued it will lose value against gold.
Token money is fiat money.
Currency is not denominated in labour time as it would expose the fact that labourers get paid less than the value they create.
Currency represents commodity money.

Credit Money – e.g. the original pound notes issued by the Bank of England. They were payable in a certain amount of gold.
Credit splits the act of buying from the act of paying. You pay with credit, not money & incur a debt that has to be paid in money.
credit money is always payable in another form of money; either token or commodity money.
Fractional reserve banking allows banks to create a supply of credit money.
Credit money permits overproduction on a gigantic scale.

Monetary Crises

At some point issuers of credit money will find themselves unable to raise enough metallic or token money to redeem all the credit money they have created, e.g. in the form of a bank run.

“ The function of money as the means of payment implies a contradiction without a terminus medius. In so far as the payments balance one another, money functions only ideally as money of account, as a measure of value. In so far as actual payments have to be made, money does not serve as a circulating medium, as a mere transient agent in the interchange of social labour, as the independent form of exchange-value, as the universal commodity. This contradiction comes to a head in those phases of industrial & commercial crises which are known as monetary crises. Such a crisis  occurs only where the ever-lengthening chain of payments, an artificial system of settling them, has been fully developed. Whenever there is a general & extensive disturbance of this mechanism, no matter what its cause, money becomes suddenly & immediately transformed from its merely ideal shape of money of account, into hard cash. Profane commodities can no longer replace it. The use-value of commodities becomes valueless, & their value vanishes in the presence of its own independent form. On the eve of this crisis, the bourgeois, with the self-sufficiency that springs from intoxicating prosperity, declares money to be a vain imagination. Commodities alone are money. But now the cry is everywhere money alone is a commodity. As the hart pants after fresh water, so pants his soul after money, the only wealth. In a crisis, the antithesis between commodities & their value-form, money, becomes heightened into an absolute contradiction. Hence, in such events, the form under which money appears is of no importance. The money famine continues, whether payments have to be made in gold or in credit money such as bank note.” Marx, Capital, Ch.3 Vol I

The $ System in the 2007/08 Crisis

In August 2007 speculators dumped the $ & bought gold & other commodities as they expected the Fed would turn to the ‘printing presses’ to resolve the ‘credit crunch’.

The price of oil went from $75 in August 2007 to $147 in July 2008.
Gold went from $672 to $964 over the same period.

This increase in prices meant more $’s were required, but the Fed hadn’t increased the amount of $’s by much, & when the markets realised they panicked & collapsed.

Gold fell to $724 in October 2008.

Gold (commodity money) is an alternative to the $ (token money).


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